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The Impact of the Government's Deflation Countermeasures
Osamu Nariai, professor, Reitaku University
In his February 18 meeting with U.S. President George W. Bush, Prime Minister Jun'ichiro Koizumi announced his intention to do all he can to implement comprehensive antideflation measures and revive the Japanese economy. On February 27, his cabinet announced a package of emergency measures to combat deflation. This package calls for (1) the identification of nonperforming loans through stringent special bank audits by the Financial Services Agency and the acceleration of their disposal by strengthening the functions of the Resolution and Collection Corp.; (2) asking the Bank of Japan to provide liquidity should rumors damage a bank's ability to raise funds; (3) propping up share prices through stricter restrictions on short-selling of stocks; and (4) asking the BOJ for further monetary relaxation.
The central bank, meanwhile, responded on February 28 with a decision to ease money, primarily by increasing its outright purchases of long-term government bonds from 800 billion yen to 1 trillion yen per month.
Share prices have now stopped falling, but there are doubts about how long this will continue. These measures are likely to be followed once again by injections of public funds into the banking sector (7.46 trillion yen was provided in 1999). Such massive injections will have to be made as meaningful as possible. Issues that will need to be addressed include holding banking executives accountable for the mismanagement of their institutions, close examination of management streamlining plans, and provision of funds for growth sectors. Unless these considerations are fully addressed, the injection of public funds will merely repeat the same mistakes made three years ago. Sweeping changes in the structure of management are called for, even if they mean temporarily nationalizing troubled banks.
It remains to be seen whether the antideflation measures will stop the vicious circle of deflation, increased corporate bankruptcies, and ever more bad debts. Also unclear are the government's and banks' standards by which companies on the brink of collapse are either rescued with additional financing or left to drown in their own debt.
The most important factor in resuscitating the Japanese economy is to restore public confidence. All are watching closely to see whether the latest measures and possible capital injections into banks will contribute to such a restoration of confidence in the economy. |
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